What happens to option holders in cases of acquisitions?

[newwurldmn]

Thank you, that was helpful. (And yes, AYA is trading at $19 even though the non-binding proposal on the table is for $21, so I assumed the discount was to reflect possibility it may not happen.)
I'm interested to see how this all plays out in the options arena...I'd always presumed that market-makers set their bid/ask spreads algorithmically as a function of the standard option-valuation inputs, but seems like they'd be leaving themselves open to massive exploitation if they didn't have a way to account for corporate actions. Indeed, looking at the July 2016 Calls (furthest time-horizon for which there are contracts), there's currently no Bid even being quoted on any of the Calls higher than the $20.00s, even though the open interest for the July $22 Calls stands at 400. (The Bid stood at ~$1.10 before the $21 offer was announced). So it seems like the MM's have indeed adjusted.

(On that last point, not to get too nitty, but I was under the impression that market makers have a legal obligation to provide for a functioning marketplace, though I guess I don't know what that actually means in practice vis-a-vis fluid situations like this one...I mean, it's reasonable that a MM shouldn't have to post any live bid, say, on the afternoon of an option's expiration if it's far OTM...but it doesn't seem quite as clear-cut for this situation. I mean, for the same reasons that the underlying is still trading at a discount to the $21 offer -- there's a decent chance it falls through -- it stands to reason that there's still SOME extrinsic value to the July $22 Calls, but those option-holders are SOL without any Bids...)

Option MM aren't required to post bids in the US.

And yes, you can't sell a worthless option for zero

 

[Monorail]

And yes, you can't sell a worthless option for zero

But that's just the point: it's not worthless for the very same reason the underlying is still trading at a discount to the non-binding proposed offer of $21: the buyout isn't carved in stone just yet. (and yes, this is where you come back and tell me to put in a $0.01 Bid if I'm so sure there's value.) Whatever, I don't want to get too far off into the weeds on that last point. And it's moot if MM's aren't required to actually post Bids (i thought there was some sort of requirement there...) Seems like I got my OP questions answered as well as I'm going to: that the time-value component of an option's premium does indeed get pretty noisy in the context of a proposed corporate action with an uncertain outcome.

 

[Sig]

But that's just the point: it's not worthless for the very same reason the underlying is still trading at a discount to the non-binding proposed offer of $21: the buyout isn't carved in stone just yet. (and yes, this is where you come back and tell me to put in a $0.01 Bid if I'm so sure there's value.) Whatever, I don't want to get too far off into the weeds on that last point. And it's moot if MM's aren't required to actually post Bids (i thought there was some sort of requirement there...) Seems like I got my OP questions answered as well as I'm going to: that the time-value component of an option's premium does indeed get pretty noisy in the context of a proposed corporate action with an uncertain outcome.

Maybe not worthless, but worth less than the commission, exchange fees, and $.01/share. I think the MM requirements to post a bid/ask are with stocks, not options. It would be a tall ask to require that for all options in an option chain, and tough to define what didn't require a bid/ask since "far OTM" is defined by both the distance OTM and the volatility of the underlying, which is itself up to debate.

 

[OptionGuru]

........ but I was under the impression that market makers have a legal obligation to provide for a functioning marketplace, though I guess I don't know what that actually means in practice vis-a-vis fluid situations like this one........

I think the MM's only have to provide a market for a certain amount of contracts, perhaps as low as 10 or something like that. If the demand his high then the can raise the price to cover the risk.

 

[rmorse]

I was an Option MM on the Amex. It might be different now as I left in early 2010. I was required to sign up to quote a symbol. Once approved, I had to make 10 up markets, no more than $5 wide. I also had a requirement to do a large percentage of my volume in the name I signed up for. That way I could not use my position to not make good markets and just cherry pick trade with brokers in the crowd. The requirements to make "good" makets and be competitive were not high, but the fixed cost to do nothing was not small. I would say $10K/month all in for a sole prop trader right now and $5mm in captial would be a fair estimate.